“Human progress has always been driven by a sense of adventure and unconventional thinking. But amidst calls for ‘bread and circuses’, these virtues are often forgotten for the sake of cautiousness and political correctness that now rule the world.” -Andre Geim, physicist, Nobel Prize lecture
REPLIES
Thanks to everyone who sent in feedback to last week’s newsletter. In particular, one reader raised the following objection to Robert’s piece “Bubbles are good!”
I have some concerns about the "Bubbles are Good" essay. What isn't addressed is: what is a bubble? What are its causes? How is a bubble different than a regular bull market? What is the role of government money-printing in creating bubbles? How does government redistribution of wealth through inflation distort the incentives within the wider market, and how does that contribute to "bubble companies" failing or succeeding? Looking only at the average outcome of a bubble bursting is not enough to tell whether they are good or bad.
Here's Robert’s response:
What is a bubble? The key characteristic is almost always a rapid increase in prices followed by a sharp drop. But how big an increase and how sharp a drop? How long until the drop? All great questions that don’t have objective answers. So, our focus is on the other characteristic—the burst of exuberance that is associated with the rapid increase. In a Minsky framework, a bubble happens when a legitimate boom is followed by a period of euphoria that sends prices to the moon and ends with profit-taking that rapidly evolves into panic and loss-taking.
Our point is that the euphoria phase—when investors become enchanted with powerful new technologies and their applications—sparks a burst of exploration with an unusually long runway for trial and error to figure out the new opportunities.
Would companies like Amazon, Tesla, and Uber exist in their current forms without these moments of exuberance? We will never know for certain, but we do know that then cash-burning Amazon was able to raise almost $700m in February 2000 and without this money may well have gone out of business during the dot-com crash. Elon Musk has acknowledged that Tesla was a month from bankruptcy during the Model 3 ramp-up. And Uber has reportedly lost a total of $30 billion (so far!) to support the company’s growth and evolution.
Bubbles are good. Not every bubble—certainly not inflationary broad-based nominal bubbles—but those where the excitement supports exploration and iterative learning.
INSIGHT
Ingenuism and Failure
Robert Hendershott
Photo by SpaceX on Unsplash
One of Silicon Valley’s key virtues is a culture that tolerates failure. Investors accept that many, even most, of their start-up investments will disappoint. This does not stop them from taking risks. Founders of eventual failed start-ups are not penalized in their future ventures. In most cases the experience is considered a plus.
This is very different from most of humanity where failure is avoided like the plague—and punished like a crime. In her book on failure, The Up Side of Down, journalist Megan McArdle notes that “the process most people think of as ‘bankruptcy,’ doesn’t even exist in most of the rest of the world.” She goes on:
European bankruptcy laws treat failure as if it were a simple function of effort and personal virtue. As a result, they end up punishing people whose only sin was to take a chance on starting a business. And they inadvertently punish themselves, when potential innovators decide it’s not worth the risk. Compare the United States to France: we have twice the rate of new business ownership, twice the rate of early-stage entrepreneurship activity—and consequently, three times the rate of established business ownership.
America “lax” bankruptcy rules have made space for failure. And in the 21st century, largely under the influence of Silicon Valley, we are seeing failure being embraced in a whole new way. A way that makes even more dramatic results possible.
Imagine someone says that they “failed to learn.” Virtually everyone will read that statement as they failed to learn a lesson. Read it again. Why don’t you assume that it says that they “failed (in order) to learn”?
Biology and culture often preclude us from relating to failure like it is the ultimate opportunity to learn and to make progress. But it is, and in the 21st century Silicon Valley has begun to institutionalize failure as opportunity. SpaceX launches rockets that it is almost certain will crash and celebrates when they do. Not (just) because of the impressive fireworks, but because each crash brings SpaceX closer to their goal of making space accessible.
A core tenant of Ingenuism is that ingenuity requires the freedom to try/fail/learn/try again. And this gets supercharged if you do not just tolerate failure but welcome and embrace it. Failure is not just acceptable; it is how you make the most progress the fastest. If you are not failing, you are not pushing your limits.
Our generally toxic relationship to failure is a significant and insidious impediment to innovation and progress. We look forward to revisiting this topic in more depth in the future.
QUICK TAKES
Canadian Silicon Valley is to Silicon Valley as Canadian bacon is to bacon
One of the keys to understanding what constitutes a supportive environment for innovation is to look at attempts to replicate Silicon Valley in other locations. Most of those attempts have failed.
Here’s an interesting analysis of what’s holding back the Canadian tech scene. The author argues that, despite nurturing some successes like Shopify, “The Canadian tech scene, as it currently operates, does not support startups. It stifles them.” Example:
The most visceral difference between the Canadian startup investing scene versus the Bay Area is speed. It is not an incremental difference: they operate on entirely different time scales. Bay Area startups can go from initially announcing their pre-seed round to closing an oversubscribed round of SAFE notes in 72 hours. In Canada, you’re generally lucky if you can get a deal done in 3 months.
Also notable is the impact of government support on Canada’s tech scene.
[W]ell-meaning but disastrous government initiatives to support the startup ecosystem relentlessly pump money into the startup scene. This money is advertised as “free” or “non-dilutive”, but in reality it’s the most expensive kind of money you can imagine: it’s distracting, it begs justification, it kills creativity, and it turns your startup into a government work program.
Much more at the link.
The Great Stagnation is coming to an end, says the author of The Great Stagnation
Economist Tyler Cowen was one of the early advocates of the “Great Stagnation” hypothesis we talked about a few weeks ago. In a recent panel, economic policy analyst James Pethokoukis asked Tyler whether he thinks we’re still stagnating.
I think the odds are we are, today, on the cusp of another revolution based on new general-purpose technologies, which I would define as some mix of internet, computers, and computational power. So in 2011, when I published the book, I thought the great stagnation would end within the next 20 years, and odds are what we’re seeing today is the great stagnation ending. . . .
I think the new innovations will be special in at least one significant way: A lot of them will not contribute that much to per capita GDP. So, if you take the mRNA vaccines, they’re influencing what would normally be called the “cyclical component.” If you think of older people as more likely to die from COVID-19 . . . by saving lives—I’m not suggesting per capita GDP will go down—but the impact on human welfare will be much greater than what would appear to be the long-term secular trend in GDP. Also, two of the big advances that might happen are a vaccine against HIV/AIDS and an effective vaccine against malaria. Those would be incredible advances for humanity, but I don’t know how much they would show up in US per capita GDP or productivity—possibly not really much at all.
Even that might be a bit pessimistic. According to the Wall Street Journal, “worker productivity might be about to accelerate thanks to pandemic-induced technological adoption, which could lift economic growth and wages in coming years.”
Forced to operate with less contact between customers and workers, companies plowed money into technology, automation and videoconferencing software. Consumers have had to embrace digital services such as electronic commerce and telemedicine, and many find they like it.
That doesn’t mean the pandemic will be a net-positive. We’ll never know what people would have done with all the wealth that was lost as the result of the pandemic and lockdowns. What it does testify to is our incredible power to adapt—and to pull some good out of the bad.
A nuclear power plant on every desktop
Bill Gates thinks nuclear power needs to play an important role in the future of electricity. To make that happen, he founded TerraPower to create the next generation of nuclear technology.
The evidence says that legacy nuclear power is a safe source of energy, and “TerraPower’s Natrium Reactor plants will be safer still, thanks in large part to a more reliable cooling system for its reactors.”
Perhaps most importantly, Natarium is expected to be only a fraction of the cost of conventional nuclear.
In America, the cost of building a conventional nuclear power plant can be in the multibillions. (For instance, two units being built at Plant Vogtle in Georgia are expected to cost more than $25 billion, according to analyst estimates cited by Reuters.)
The target cost for a commercial Natrium plant is $1 billion in capital expenditures, according to TerraPower. That includes engineering, procurement and construction costs of the plant.
The real question is why nuclear hasn’t already come to dominate the grid. Jason Crawford at Roots of Progress summarizes some of the evidence. It suggests that the basic hurdle is nuclear’s high costs—and that these high costs are rooted in poor thinking about risk on the part of government, industry, and the public. Though see also this Twitter thread, which argues other factors were important as well.
Let’s hope they don’t unionize
Robots are in the process of revolutionizing shipping. Morning Brew highlights FedEx’s plans to automate a huge part of its business.
Robotic arms: FedEx’s Memphis facility installed four robotic arms in March, which move packages from collection bins to conveyor belts.
Randall, Colin, Sue, and Bobby can each sort ~1,300 packages per hour.
Delivery robots: Roxo, the autonomous bot FedEx began testing last year, can make local same-day deliveries. What’s new this year? FedEx Autonomous Mobility Ecosystem (FAME): A management platform—for use with Roxo and future autonomous tools—that can dispatch a bot for a particular task or control a fleet.
Autonomous vehicles: FedEx Ground is testing out autonomous vehicles to help move trailers from loading docks. FedEx told us it’s also invested in ~5x more of Vecna Robotics’s autonomous “tuggers,” which use sensors to navigate and move bulky packages between loading spots.
It’s staggering to think of how much human physical labor this will liberate.
When trial-and-error eliminates the errors
There may be much about air travel that needs to be disrupted, but here’s one achievement that should leave us in awe: in the last twelve years, U.S. airlines have carried more than eight billion passengers without a single fatal crash.
This is partly the result of technological advances. But it’s also the result of an ambitious effort to promote trial-and-error learning:
The achievements stem from a sweeping safety reassessment—a virtual revolution in thinking—sparked by a small band of senior federal regulators, top industry executives and pilots-union leaders after a series of high-profile fatal crashes in the mid-1990s. To combat common industry hazards, they teamed up to launch voluntary incident reporting programs with carriers sharing data and no punishment for airlines or aviators when mistakes were uncovered.
The pioneers bucked deep-seated doubts from some insiders and outright opposition from pilots’ groups worried about disciplinary blowback. By the end of the 1990s, the Federal Aviation Administration, plane maker Boeing Co., labor representatives and the largest U.S. airline trade association all endorsed the unified, data-driven safety agenda. Together, they devised steps to make it happen. . . .
The results have been remarkable. In 1996, before the safety reboot began, U.S. carriers had a fatal accident rate of roughly one crash for every two million departures. That year alone, more than 350 people died in domestic airline accidents, including 230 in the infamous fuel-tank explosion on TWA Flight 800 that sucked scores of passengers out of the fractured fuselage. Within 10 years, the fatal accident rate had been reduced by more than 80%, beating a goal set by a White House commission.
Ingenuists believe that connection and collaboration are springboards to innovation. But innovations are not only products. They are often processes that generate prosperity—and save lives. By creating an environment that embraces failure as a path to progress, the U.S. airline industry has created a miracle.
The aviation experience begs the question of what might have been possible if nuclear power plant technologies had been freed to evolve and improve. A nuclear plant is complex, and the general view is that it is inherently fragile and prone to failure. You know, like early airplanes. Safe and reliable nuclear plants are an engineering challenge, but not a bigger challenge than flying a 200 ton 747 from New York City to London over and over without fail.
Concerns about the safety of nuclear were always overblown, but just imagine how safe they’d be had nuclear power climbed the same learning curve as commercial aviation. Imagine what other innovations are being stifled today that will stop us from solving the problems of tomorrow.
INCREASE YOUR INGENUITY
Time and mental energy are finite. Often we spend that time and energy complaining and explaining why things have gone wrong and why it’s not our fault. But as VC Ben Horowitz says, “All the mental energy you use to elaborate your misery would be far better used trying to find the one seemingly impossible way out of your current mess. Spend zero time on what you could have done, and devote all of your time on what you might do. Because in the end, nobody cares; just run your company.”
Speaking of Horowitz…
RECOMMENDATIONS
The Hard Thing About Hard Thingsby Ben Horowitz
Ben Horowitz helped build several tech companies and later went on to co-found the venture capital firm Andreessen Horowitz. This book tells his story and extracts lessons for start up CEOs.
What makes it atypical of standard management books? According to Horowitz:
Every time I read a management or self-help book, I find myself saying, “That’s fine, but that wasn’t really the hard thing about the situation.” The hard thing isn’t setting a big, hairy, audacious goal. The hard thing is laying people off when you miss the big goal. The hard thing isn’t hiring great people. The hard thing is when those “great people” develop a sense of entitlement and start demanding unreasonable things. The hard thing isn’t setting up an organizational chart. The hard thing is getting people to communicate within the organization that you just designed. The hard thing isn’t dreaming big. The hard thing is waking up in the middle of the night in a cold sweat when the dream turns into a nightmare. The problem with these books is that they attempt to provide a recipe for challenges that have no recipes. There’s no recipe for really complicated, dynamic situations. There’s no recipe for building a high-tech company; there’s no recipe for making a series of hit songs; there’s no recipe for playing NFL quarterback; there’s no recipe for running for president; and there’s no recipe for motivating teams when your business has gone to crap. That’s the hard thing about hard things—there is no formula for dealing with them.
There is no formula for innovation precisely because innovation requires doing something new. But there are principles that can help an innovator solve the unique, insanely hard problems that come with building an innovative company.
Horowitz has much to say about those principles. But the greatest value of the book isn’t in the lessons themselves. It is in detailing with vivid exactness the kinds of problems an innovator has to solve.
Without understanding the environment innovators operate in, we cannot understand the larger institutional, political, legal, and cultural factors that nurture and hold back progress. Horowitz’s book is a valuable foundation.
Until next time,
Don Watkins
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Genuinely ingenius. The articles are rapture.